It can be expensive to turn a plan into a building when you want to build a house, an apartment building, or a new commercial site. To get the money you need for the job, a “long term construction loan” is the best option.
A regular mortgage is used to pay for a house, while a short-term loan for construction is only repaid when the building is completed. With a long term loan for a building, you can pay for both the building and stable funds after it’s done.
Your best option for securing loans for senior housing and other real estate-related needs is to work with a Senior Housing Lender. They have been underwriters for 30 years and have over 200 private loans and buyers in their business.
The blog’s goal is to educate and guide potential borrowers through the process of securing the funds they need to make their dreams a reality.
Understanding the Landscape: What is a Long Term Construction Loan?
Defining a Long Term Construction Loan
A long term construction loan is a specialized type of financing that can help you transform empty land into a fully operational business that generates revenue. Unlike a “construction-only loan,” which only pays for the construction phase and typically requires a separate “take-out” loan (a permanent mortgage) when the job is complete, a long term construction loan usually converts into a permanent mortgage upon completion. It’s possible to set this up as a “construction-to-permanent loan” (single-close), which means that the same loan pays for both parts, or as a “two-time close,” which means that the construction loan and the permanent loan are closed at different times.
This type of loan is best suited for large, complex projects that require substantial funding, such as nursing homes, assisted living facilities, and senior housing. It works well for large mixed-use properties and student housing as well. During their various stages of growth, these projects require ongoing financial support, and a smooth transition to a long term mortgage can often be beneficial.
Key Characteristics and How They Work
Several distinct characteristics define long term construction loans:
- Phased Disbursements (Draw Schedule): You don’t get all the money at once. They are instead sent out in “draws” as certain construction milestones are met and inspections confirm that they have been achieved. This “draw schedule” ensures that the loan is used carefully, that payments align with progress, and that the lender is significantly less at risk.
- Interest-Only Payments During Construction: “Interest-only payments” are what people usually do with money that they borrowed during the “construction phase.” The principal payment won’t be due until the project is completed and the loan enters its permanent phase. This allows the customer to choose, making it easier to obtain cash during the busy building season.
- Collateral: The loan is secured by the property, which includes both the land and all improvements made during the building process. The value of the collateral increases as the building progresses, and so does the value of the land.
- Higher Interest Rates (Initially): Most of the time, “higher interest rates” are charged on construction loans compared to standard mortgages. This is because lending money for a project that isn’t generating revenue yet is riskier, as the project could be delayed, cost more than expected, or the market could change while it’s being built. A standard, such as the prime rate, is often used to illustrate how these rates fluctuate. They might change as the project progresses closer to completion and receives permanent funding.
Who Needs a Long Term Construction Loan? Our Target Audience
The Aspiring Real Estate Developer
Suppose someone or a company wants to “build a home” from the ground up or, more commonly, build bigger commercial and residential buildings. In that case, they need a long term construction loan. We primarily assist senior living facilities in securing the necessary funding, including nursing homes, assisted living facilities, and memory care centers. These places must carefully consider what an older population will need and continue to provide them with resources. This type of loan is beneficial for more than just caring for seniors.
It’s also great for people who own student housing or mixed-use properties, who want to either renovate them and sell them quickly, hold on to them and improve their value over time, or keep them and rent them out to generate a regular income.
The Strategic Investor
Strategic owners who want to buy land for future development or undertake large-scale construction projects that will add value can benefit from long term building loans. Most of the time, these owners require a significant amount of money to convert vacant land or rundown buildings into profitable businesses. We do more than just lend money; we also help investors find the best capital structures for their projects and ensure their success by connecting them with excellent growth opportunities.
Benefits of a Long Term Construction Loan for These Audiences
A long term construction loan is beneficial for the following groups:
- Full Funding: It covers every step of the building process, from breaking ground to applying the finishing touches.
- Financing Made Easier: It makes financing easier because, after the building is finished, you usually don’t need a separate fixed mortgage. It takes less time and costs less to close.
- Keeps things stable and predictable: This helps project managers and investors better control “construction costs,” which in turn helps them make better budgets and avoid sudden financial shocks during the project’s lifecycle.
The Step-by-Step Process of Securing a Long Term Construction Loan
Obtaining a long term construction loan is a step-by-step process that requires careful planning and execution. As financial experts and underwriters, we understand how to simplify processes for our clients.
Step 1: Preparation is Key – Laying the Foundation for Your Loan Application
Your chances of getting a loan depend on how well you prepare.
- Plan for the Whole Project: This is your project’s guide. It needs to have complete architectural and building plans. This comprehensive budget lists all the “construction costs” and a reasonable deadline for finishing. Lenders want to see a clear plan for how the money will be used.
- Checking your financial health: The health of your personal and business finances is crucial. Lenders usually want a high “credit score,” usually 680 or higher, to show that you can handle your money. It’s also important to know your “debt-to-income ratio” (DTI). Lenders typically require a debt-to-income ratio (DTI) below 43% to ensure you have sufficient disposable income to cover payments. You’ll also need to show proof that you have enough funds on hand for a down payment, which is typically 20–30% of the total job cost. We offer financial advice services to help individuals prepare for loan applications by enhancing their financial profiles.
- How to Choose a Reliable Builder: Lenders typically require” a licensed, skilled contractor with a history of work similar to yours. A trustworthy builder instills confidence in the lender that the project will be completed successfully.
Step 2: The Application and Underwriting Process
The application and underwriting process begins once the groundwork is complete.
- How to Choose the Right Lender: This is where our big network comes in handy. As a “table lender” and a “correspondent lender,” we give you a lot of choices thanks to our network of “more than 200 private lenders and investors.” With this information, we can find the best loan for your needs. Bridge loans, hard money loans, DSR loans, USDA B&I loans, SBA loans, FHA commercial property investment loans, building loans, term loans, no-doc loans, lite-doc loans, and state income loans are just a few of the loan types we help people obtain.
- Sending in your application: Along with detailed financial statements, recent tax returns, and a signed construction contract with your chosen builder, you will be required to submit a comprehensive package of paperwork.
- The Review of Underwriting: This is a crucial step. Our 30 years of experience as “underwriters” means that your application will be looked over quickly and carefully. The banker carefully assesses the project’s viability, potential risks, and the borrower’s ability to repay the loan during this step. This involves examining your finances closely, the project plan, the builder’s background, and the expected value of the finished property.
Step 3: Approval and Loan Structuring
Once the underwriting process goes smoothly, you’ll proceed to the acceptance stage.
- Loan Commitment: If you are accepted for a construction loan, you will receive a letter agreeing to the terms, conditions, and “interest rates” of the loan. It is essential to read this document carefully.
- Make a schedule agreement: The “draw schedule” will be officially agreed upon. According to this document, money will be sent during the “construction phase” only after specific goals have been met and confirmed.
- Releasing the construction loan: All legal papers are signed at this first closing, which makes the construction loan official and releases the funds according to the drawing plan.
Step 4: The Construction Phase and Fund Disbursements
Now that the loan is paid off, building can begin, and money is sent where it’s needed.
- Taking care of draws: As “construction work” goes on and goals are reached, you will officially ask for money, which is called “draws.” This typically involves hiring a lender or a third-party verifier to confirm that the work is completed, followed by the submission of bills for materials and labor. Making sure that funds “cover the costs” of finished “construction work” and that the project stays on track is what this process does.
- Keeping an eye on progress: It’s essential to closely monitor the construction progress to ensure it stays on schedule and within budget. Any changes should be reported right away to the company.
- Spending Money on Interest During Construction: When the loan is in the “construction phase,” you will only be paying interest on the money that has already been paid, not the principal. This structure helps keep track of money during the busy building time.
Step 5: Conversion to Permanent Mortgage (for Construction-to-Permanent Loans)
As the last step in “construction-to-permanent financing,” the loan is turned into a permanent one.
- When it says “Construction is completed,” As soon as the building is finished and approved (for example, by getting a certificate of occupancy), the loan changes from a construction loan to a fixed mortgage.
- Re-evaluation and Last Underwriting: The property is re-evaluated to determine its actual market value. There may also be one final check by the underwriters to ensure that all requirements have been met.
- Change of Loan: When the construction loan amount is paid off, it automatically converts into a long term, permanent mortgage. Since the loan has a fixed term, you will now start making regular principal and “monthly payments” on the whole amount. This seamless transition is the primary benefit of “construction to permanent financing.”
Essential Considerations for Your Long Term Construction Loan
To get a long term building loan, you need to know more than just how construction works. The success of your project will depend on several key financial and strategic factors.
Understanding Costs Beyond Construction
It is essential to include more in your budget than just the building itself. Besides the direct “construction costs,” you need to think about:
- Costs that are easy to understand: These include administrative and necessary expenses incurred before building, such as fees for architects and engineers, legal fees, title insurance, and appraisals. These things can add up to a lot.
- Funds for emergencies: Problems that weren’t expected almost always happen in construction. A backup fund, usually 10–15% of the total “construction costs,” is strongly suggested to cover unplanned costs, material price increases, or delays that were not expected. This helps keep the cost of your job within budget.
- Costs of closing: Don’t forget that closing costs are due for both the first construction loan and, if necessary, the later “permanent mortgage” conversion. Some of these fees are assessment fees, legal fees, origination fees, and title insurance fees.
The Importance of a Strong Credit Profile
If you want to get a long term building loan, your best bet is to have good credit. Tell them again that having a high “credit score” and a low “debt-to-income ratio” (DTI) can help them get a loan, give them better loan terms, and maybe even lower “interest” rates. Lenders are less likely to turn down people with good credit.
Some things you can do to improve your credit are to keep paying off your debts, keep your payment records spotless on all of your accounts, and avoid opening new lines of credit right before you apply for a loan.
Navigating Challenges
During a long term construction job, problems can happen even if everything is carefully planned:
- Possible Delays and Cost Increases: Construction projects can be delayed by various factors, including adverse weather conditions, material shortages, labor issues, or unforeseen site changes. Plan well, set a reasonable deadline, hire a trustworthy worker, and have a lot of money set aside in case something goes wrong.
- Changes in the market: Changes in “interest rates” can affect building loans with variable rates. There are choices with fixed rates, but many construction loans have variable rates that change based on benchmarks, such as the prime rate. Be ready for the possibility that your interest payments will change.
- Lender Requirements: There are strict paperwork and review processes for long term building loans. The process will go more quickly if you have all the information the lender asks for and know what they want from the start.
Why Choose Our Company for Your Long Term Construction Loan
To get through the complicated world of “long term” real estate investments and building financing, you need help from someone who has done it before. There are clear benefits to choosing our company:
Without a doubt, the experts: Being an “underwriter” for 30 years has given us a deep knowledge of “real estate” financing and how complicated construction projects can be.
- Different Loan Options: As both a “table lender” and a “correspondent lender,” we offer a wide range of loan products and solutions to ensure we find the best one for your project.
- Broad Reach: Our large group of “more than 200 private lenders and investors” gives you more chances to get competitive loans and custom solutions that regular banks might not provide.
- Specialized Focus: We have a proven track record of success and are experts in senior housing, including assisted living, memory care, and nursing homes. We have a good understanding of how these facilities generate revenue and what they require to operate smoothly.
- Comprehensive Financial Consulting: We don’t just provide loans; our financial consulting services are designed to help you with everything, from project planning to finding the best way to finance it.
Conclusion
A long term construction loan is often the key to making a wide range of real estate dreams come true, from dream homes to critical senior housing facilities. Our company is committed to being your business partner and offers a unique value. We’ve been a top Senior Housing Lender for 30 years and an experienced underwriter for many years, so we can help both investors and customers. Not only do we offer a variety of loan products, but we also provide comprehensive financial advice to help you feel confident as you navigate the complex real estate market. We’re committed to ensuring the success of your project.
Are you ready to bring your idea to life? Contact us to discuss your next long term construction loan or any other real estate financial needs you may have.
FAQs
What is the typical term for a long term construction loan?
While the initial “construction phase” typically spans 12-24 months, the “permanent mortgage” portion of a long term construction loan can extend significantly, often ranging from 15 to 30 years.
Do I need to own the land to get a long term construction loan?
Not always, though owning the land can be beneficial, as it serves as initial collateral. Some long term construction loans are structured to include the cost of land acquisition in the total financing.
How are interest rates determined for a construction loan?
Interest rates for construction loans are typically variable during the construction phase, often tied to a benchmark like the prime rate plus a lender’s margin.2 Due to the inherent risk, “higher interest rates” are ordinary initially. Upon conversion to a “permanent mortgage,” the rate can often be fixed.
Can a long term construction loan “cover the costs” of renovation projects?
Yes, a long term construction loan can “cover the costs” of substantial renovation projects, especially if the renovation is significant enough to be considered akin to “new construction” or a major overhaul, such as adding a new wing or completely gutting and rebuilding an existing structure.
What is a “construction-to-permanent financing” loan?
A “construction-to-permanent financing” loan is a single loan that funds the entire “construction phase” of a project. It then seamlessly converts into a “permanent mortgage” once construction is completed.” This single-close structure streamlines the financing process for borrowers.
